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Feds allege more than $100M biofuels scam

Federal officials say an Indiana-based biofuels company cheated investors and taxpayers out of more than $100 million in what U.S. attorney Joe Hogsett called the largest tax and securities fraud scheme in

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Feds allege more than $100M biofuels scam

Jill Disis, The Indianapolis Star
8:10 p.m. EDT September 18, 2013

U.S. attorney calls it largest tax and securities fraud in Indiana's history.

U.S. Attorney Joe Hogsett announces during a press conference in Indianapolis on Wednesday, Sept. 18, 2013, that six people have been arrested on conspiracy, wire fraud and other charges in an alleged biofuels scam they say cost the government and investors more than $100 million. Indictments allege the defendants sold more than 35 million gallons of fuel as 100 percent biodiesel when it actually contained some petroleum diesel.(Photo: Michael Conroy, AP)

Prosecutors depict a case centered around Middletown-based E-Biofuels, the details of which resemble some scheme portrayed in a Hollywood movie.

Court documents say E-Biofuels would buy low-grade fuel from elsewhere, ship it to its Middletown plant, switch the labels, mark up the prices and sell the product as premium fuel to their customers.

E-Biofuels executives and their associates, prosecutors say, would then cash in on tens of millions of dollars in federal tax incentives geared toward producers of premium biofuel.

A pair of co-conspirators behind two New Jersey-based companies also pocketed millions off the scam, court documents say, spending lavish amounts on diamonds, Pablo Picasso artwork and a Ferrari.

The low-grade fuel was derived from premium fuel whose producers legitimately received the federal tax credits. The federal government, prosecutors noted, ended up doling out incentives twice for the same fuel: first to the companies that actually produced it and again to E-Biofuels.

"They're repackaging it fraudulently to get another bite of the apple," Assistant U.S. Attorney Steve DeBrota said Wednesday.

"There's no question that the taxpayers got hit hard by that extra claim."

The lawsuit alleges the company fraudulently collected on at least $35 million in tax breaks, splitting the takings up among six defendants named in the suit, including E-Biofuels executives Craig, Chad and Chris Ducey.

Prosecutors say the scheme started in July 2009 and lasted until the company filed for Chapter 7 liquidation bankruptcy in April 2012.

At the time of the bankruptcy, E-Biofuels said it was about $17 million in debt. Thursday morning, the company's Middletown facility and several pieces of equipment will go up for auction.

The Duceys could not be reached by telephone Wednesday.

Craig Ducey in 2007 was appointed by the National Republican Congressional Committee to serve on the Business Advisory Council.

Joseph Furando, of Caravan Trading Co., and Evelyn Katirina Pattison, of CIMA Green, also were charged. The court documents say Furando and Pattison, both of New Jersey, pretended that E-Biofuels made the fuel and passed it off to their own customers, fully knowing where the fuel came from.

A sixth person, Jeffrey Wilson, president and CEO of Evansville-based Imperial Petroleum Inc., was also named in the lawsuit. His company bought E-Biofuels in July 2010, and prosecutors say Wilson hid the fraud from his own investors, shareholders and outside auditors, helping the co-conspirators pocket another $10 million in the process.

An additional $55 million, Hogsett said, is alleged to have been stolen from E-Biofuel's investors.

"The numbers in this case, frankly, are staggering," Hogsett said. "These people believed that they and their businesses were entitled to a free ride on behalf of the taxpayers and on the back of unsuspecting customers."

DeBrota said the fuel made it into cars in Indiana and other Midwestern states but the diluted blend posed no harm to vehicles. Biofuels are a renewable alternative to petroleum and can be made from animal fat and vegetable oils.

The charges raise questions about whether investors will feel confident enough to continue investing in a relatively new yet growing industry.

The Obama administration has drawn criticism from Republicans and pundits over its use of federal subsidies and tax incentives to promote business investment in alternative energy.

Chris Hurt, an agricultural economist from Purdue University, described support for biofuel-related mandates as a "political decision."

"I think (this case) does have a little bit of political value to those who've argued against biofuels," he said. "You see the bad press that comes out. Consumers and others who were indifferent about biodiesel could say, 'Well, look at the bad things that come out of this.' "

There also is the economic impact. DeBrota said E-Biodiesel is accused of falsely representing about 35 million gallons of additional biofuel on the market — an amount he said at one point in time represented about 10 percent of the biodiesel produced in the United States.

But times have changed. The American biodiesel industry has produced more than 1 billion gallons of fuel in each of the past two years, said Ben Evans, spokesman for the National Biodiesel Board.

"Overall, let's remember that federal policies are working to reduce our dependence on petroleum and reduce air pollution," Evans said in an e-mail, while acknowledging that this fraud "has been incredibly damaging to the biodiesel industry and others in the fuels marketplace."

"Unfortunately, no industry is safe from criminals who will try to game the system, whether it's an Enron or a small business."

Evans said this fraud case is similar to cases in Texas and Maryland, where two other biofuel company executives also fraudulently collected on tax incentives. The CEO of Lubbock, Texas-based Absolute Fuels was sentenced to 15 years in federal prison this April, while the head of Maryland-based Clean Green Fuel was sentenced to more than 12 years in February.

All six of those indicted in the E-Biofuels case could face up to 20 years in federal prison on some counts, as well as significant fines, Hogsett said.

The three companies also could face fines and regulatory action.

A fourth E-Biofuels employee, Brian Carmichael, intends to plead guilty to a conspiracy charge, Hogsett's office said. He faces up to five years in federal prison if convicted.

All of the other defendants appeared in court Wednesday and were put on home release. The case was assigned to U.S. federal judge Sarah Evans Barker.